Escaping Pay-for-Performance: Evidence from Financial Regulators

How do financial regulators respond to performance pay? Using the staggered transition to pay-for-performance by U.S. financial regulatory agencies and newly assembled career data on 30,000 regulators, we find that performance pay increased voluntary exits by 40–54%. A parallel reform for federal executives produced similar effects. Performance pay boosts rulemaking effort, raising the likelihood of drafting a new rule by 58–63%, and improves private sector pay, as leavers earn 38% higher starting salaries. It also weakens public sector attachment through income risk and distrust of performance evaluations. As a result, regulators with better outside options and weaker intrinsic motivation leave.